The Check Is in the Mail. Not!

By Jean Chatzky

News flash from the Federal Reserve. Sorry, it's not a drop in interest rates. It's the fact that Americans now make more payments electronically--by credit or debit card or via the Internet--than by paper checks. In 1995 consumers wrote 49.5 billion checks. By 2000 that number had dropped 14% to 42.5 billion. Meanwhile, online bill payment is now used by some 12 million households, up from 10 million in 2001.

What's driving the shift? Over the past year, electronic payment got a boost when the anthrax attacks elevated fear of using the mail, says Bill Nelson of the Electronic Payments Association. The hike in postal rates also hurt snail mail.

But the biggest factor is that consumers have caught on to the convenience of being able to check their balance 24/7 and see exactly when checks clear. The time savings is also a boon, says Javelin Strategy analyst James Van Dyke. Typically, it takes an American household about two hours to pay its 10 to 12 bills each month, according to Van Dyke's research. Automating everything takes about two hours to set up, but after that, each month's bills can be paid in about 15 minutes. Van Dyke sees people who start out paying a couple of bills electronically and then add one or two a month until they're fully automated. "It's a good kind of quicksand," he says. "The more bills you pay, the more you want to pay."

If you want in on this party, it's important to understand you're not locked into bill payment through your bank, though for many people, that sort of consolidation makes sense. Here's a look at your electronic-payment options and their natural fit:

DIRECT DEBITING By far the easiest solution, direct debiting is authorizing a creditor to reach its electronic fingers into your checking account and pull out money every month. It works best when the amount due is fixed, as it is with your mortgage, health-club dues and car payment--even utilities that offer a fixed-average-billing plan. The downside: if your balance isn't fat enough to cover these withdrawals, you'll get hit with late fees.

BILLER-DIRECT PAYMENT Many credit-card companies and other big billers allow you to pay through their websites. This requires some setup--you generally need a user ID number and password--but after that it's easy. You can see your most recent statements and transactions online and choose how much you want to pay. Print a receipt, and you're done. By coupling biller direct with direct debiting, you can sizably reduce the number of checks you write without fully automating. The downside: you have to travel from site to site.

ONLINE BILL PAYMENT Going through your bank's Web-based billing service is the most convenient way to make payments that are different each time. The catch is that there's sometimes a monthly fee of $7 to $11. But most large banks waive the fee for the first six months or for customers who maintain joint balances of about $5,000, according to CheckFree, the largest behind-the-scenes provider of home-banking technology. Bank of America and Citigroup are among a handful of major banks that have made online bill payment free for everyone.

The other benefit of going high tech: just as filing your taxes electroni-cally dramatically reduces the error rate, so does paying bills electronically. But just because it's a compelling option doesn't make it right for everyone. The American Bankers Association surveyed 1,000 account holders regarding their atm usage. It turns out that 37% say they never--ever--use the machines. It's a good bet that they prefer to pay their bills by hand as well. --With reporting by Cybele Weisser

You can e-mail Jean, a columnist for Money magazine, at moneytalk@moneymail.com

With reporting by Cybele Weisser